Split Could Set Straight Two Direxion ETFs

The combination of market volatility and the methodology of Direxion Shares Daily Financial Bull(FAS) ETF and Direxion Shares Daily Financial Bear(FAZ) has eroded the per-share value of these ETFs, prompting the issuer to notify investors of reverse splits planned for July 8.

The low price of FAZ and FAS, approximately $5 and $8 respectively, has caused a surge of volume in the funds in recent months as investors require more shares to meet intraday hedging objectives. The pending reverse split of the shares should lower transaction fees for frequent investors while discouraging investors who should avoid the funds in the first place.

FAS and FAZ were launched by Direxion in November of 2008, as measures of volatility reached incredible peaks. As investors were looking for even greater means to bet on the market's intraday moves, Direxion introduced the two triple-leveraged funds, which provide 3 times exposure for shareholders on a daily basis. Because the funds have a daily "reset" in their tracking of the market, risk that a long-term loss will result grows over time.

In one of my recent articles, "Big Action in Triple-Leveraged ETFs," I discussed how math can work against long-term holders of leveraged ETFs. Because the funds only track returns on a daily basis, a percentage move down that follows a percentage move up can be detrimental. Case in point: FAS, the 3 times bull ETF, is down more than 67% year-to-date while its bearish peer FAZ is down nearly 86%. Clearly, these ETFs do not track the movement of the actual market over time.